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Updated about 1 year ago, 12/26/2023

User Stats

22
Posts
5
Votes
Bruce Reeves
  • Investor
  • Bella Vista, AR
5
Votes |
22
Posts

Installment sale and depreciation recapture - example given

Bruce Reeves
  • Investor
  • Bella Vista, AR
Posted

Found the example below on a website. This is the way I understand my first year tax liability when selling via installment sale. But after way too much time searching online, I get conflicting advise. I modeled a pro forma in my TurboTax and did not get this result. 

What does BiggerPockets say?

Let’s say you purchased a property for $400,000 and owned it for ten years. The property’s annual depreciation would be approximately $14,545.45 ($400,000/27.5 years).

  • Your adjusted cost basis would be $400,000 – ($14,545.45 x 10) = $254,545.50
  • So the realized gain on your sale would be $500,000 - $254,545.50 = $245,454.50
  • The depreciation recapture tax would be 25% x $245,454.50 = $61,363.62

The challenge here is that depreciation taxes aren’t deferred or “spread out, " unlike capital gains taxes.” According to the IRS, you must report “any portion of the gain from the sale of depreciable assets that’s ordinary income under the depreciation recapture rules in the year of the sale.” In English, this means you must report the entire depreciation recapture amount – and pay that tax – to the IRS in the same year the sale takes place.

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